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Gross Domestic
Product
Measuring national productivity.
What is GDP?
 GDP measures how much a nation
produces.
 It is used to track the growth of a national
economy.
 GDP is the dollar value (at market prices)
of all final goods and services produced
during a stated period of time (usually
one year).
What does “final goods”
mean?
 Final goods are purchased for use by the
consumer that are not used for resale or in
further production processes.
 If goods are purchased to be used in further
production processes or for resale they are
called intermediate goods.
 Measuring only final goods helps economists
avoid counting the same goods more than
once.
Income Approach vs.
Expenditure Approach
Expenditure Approach
 GDP=C+Ig+G+Xn
 Personal Consumption
 Gross Private Investment
 Capital goods for
business
 Construction
 Inventory changes
 Government Purchases
 Net Exports
 Exports minus imports
 Xn=X-M
Income Approach
 NI + Adjustments
 National Income (NI)





Wages
Rents
Interest
Profits
Taxes
 Statistical Adjustments
 Net foreign factor income
 Statistical discrepancy
 Depreciation allowance
Nominal GDP vs. Real GDP
Nominal GDP
 GDP that is not
adjusted for changes
in prices
Real GDP
 GDP that is adjusted
for changes in price
 Real GDP =
(Nominal GDP x100)
/Price Index
 Real GDP =
(Nominal
GDP)/(Price Index in
hundreths)
What is a Price Index?
 A price index is a measure of the change
in value of money (purchasing power).
 It is used to assess inflation or deflation.
 It is found by comparing the prices of a
set amount of goods in one year to that
of another year and multiplying by 100:
 100[(Market Basket Year X)/(Market Basket Year Y)]
How can GDP be used to
assess economic growth?
 Output Growth Rate is a direct measure of the
change in GDP from one year to another
 100[(real GDP in Year 2 – real GDP in Year 1)/(real GDP in Year 1)]
 Real GDP per capita allows economists to
analyze how much of output growth went to
standard of living improvements and how much
went to an increased population
 (real GDP in Year 1)/(population in Year 1)
Computing GDP & Growth
Nominal GDP
Price Index
Population
Year 3
$5,000
125
11
Year 4
$6,600
150
12
What is the real GDP in Year 3?
What is the real GDP in Year 4?
What is the real GDP per capita in Year 3?
What Is the real GDP per capita in Year 4?
What is the rate of real output between Years 3 & 4?
What is the rate of real output growth per capita between Years 3 & 4?
(Hint: Use per capita data in the output growth rate formula.)
GDP’s Shortcomings
 Does not factor in the black market or
non-market transactions
 Does not account for externalities
 Does not consider social benefits of
consumption or production
 Does not account for utility gained or lost
as a result of consumption of a product
 (e.g. GDP can increase during war)